Turkish financial crisis adds to region’s chaos

More than coincidence accounts for the visit to Iran by Turkish Prime Minister Recep Tayyip Erdogan on January 28, the same day that his economic policy collapsed in a most humiliating way.

As the Turkish lira collapsed to levels that threatened to bankrupt many Turkish companies, the country’s central bank raised interest rates, ignoring Erdogan’s longstanding pledge to keep interest rates low and his almost-daily denunciation of an “interest rate lobby” that sought to bring down the Turkish economy. Erdogan’s prestige was founded on Turkey’s supposed economic miracle.

Hailed as”the next superpower” by John Feffer of the Institute for Policy Studies, and as “Europe’s BRIC” by The Economist, Turkey has become the Sick Man of the Middle East. It now appears as a stock character in the comic-opera of Third World economics: a corrupt dictatorship that bought popularity through debt accumulation and cronyism, and now is suffering the same kind of economic hangover that hit Latin America during the 1980s.

That is not how Erdogan sees the matter, to be sure: for months he has denounced the “interest rate lobby”. Writes the Hurriyet Daily News columnist Emre Deliveli, “He did not specify who the members of this lobby were, so I had to resort to pro-government newspapers. According to articles in a daily owned by the conglomerate where the PM’s son-in-law is CEO, the lobby is a coalition of Jewish financiers associated with both Opus Dei and Illuminati. It seems the two sworn enemies have put aside their differences to ruin Turkey.”

US President Barack Obama told an interviewer in 2012 that Erdogan was one of his five closest overseas friends, on par with the leaders of Britain, Germany, South Korea and India. Full disclosure: as the Jewish banker who has been most aggressive in forecasting Turkey’s crisis during the past two years, I have had no contact with Opus Dei on this matter, much less the mythical Illuminati.

Erdogan was always a loose cannon. Now he has become unmoored. Paranoia is endemic in Turkish politics because so much of it is founded on conspiracy. The expression “paranoid Turk” is a pleonasm. Islamist followers of the self-styled prophet Fetullah Gulen infiltrated the security services and helped Erdogan jail some of the country’s top military commanders on dubious allegations of a coup plot. Last August a Turkish court sentenced some 275 alleged members of the “Ergenekon” coup plot, including dozens of military officers, journalists, and secular leaders of civil society.

Now Gulen has broken with Erdogan and his security apparatus has uncovered massive documentation of corruption in the Erdogan administration. Erdogan is firing police and security officials as fast as they arrest his cronies.

There is a world difference, though, between a prosperous paranoid and an impecunious one. Turkey cannot fund its enormous current borrowing needs without offering interest rates so high that they will pop the construction-and-consumer bubble that masqueraded for a Turkish economic miracle during the past few years.

The conspiracy of international bankers, Opus Dei and Illuminati that rages in Erdogan’s Anatolian imagination has triumphed, and the aggrieved prime minister will not go quietly. As Erdogan abhors old allies who in his imagined betrayed him and seeks new ones, the situation will get worse.

One of the worst ideas that ever occurred to Western planners was the hope that Turkey would provide a pillar of stability in an otherwise chaotic region, a prosperous Muslim democracy that would set an example to anti-authoritarian movements. The opposite has occurred: Erdogan’s Turkey is not a source of stability but a spoiler allied to the most destructive and anti-Western forces in the region.

It seems unlikely that the central bank’s belated rate increase will forestall further devaluation of the lira. With inflation at 7.4% and rising, the central bank’s 10% reference rate offers only a modest premium above the inflation rate. About two-fifths of Turkey’s corporate debt is denominated in foreign currency, and the lira’s decline translates into higher debt service costs. Turkey is likely to get the worst of both worlds, namely higher local interest rate and a weaker currency.

Now Erdogan’s Cave of Wonders has sunk back into the sand. Few analysts asked how Turkey managed to sustain a current account deficit that ranged between 8% and 10% of gross domestic product during the past three years, as bad as the Greek deficit during the years before its financial collapse in 2011.

The likely answer is that Turkey drew on vast amounts of credit from Saudi and other Gulf state banks, with strategic as well as financial motives. Data from the Bank for International Settlements show that Turkey financed a large part of its enormous deficit through the interbank market, that is, through short-term loans to Turkish banks from other banks.

Western banks report no such exposure to Turkey; the Gulf banks do not report regional exposure, and anecdotal evidence suggests that Sunni solidarity had something to do with the Gulf states’ willingness to take on Turkish exposure.

Relations between Turkey and the Gulf States are now in shambles. Saudi Arabia abhors the Muslim Brotherhood, which wants to replace the old Arab monarchies with Islamist regimes founded on modern totalitarian parties, while Erdogan embraced the Brotherhood. The Saudis are the main source of financial support for Egypt’s military government, while Ankara has denounced the military’s suppression of the Muslim Brotherhood.

Whether the Gulf States simply ran out of patience or resources to support Erdogan’s credit binge, or whether their displeasure at Turkey’s misbehavior persuaded them to withdraw support, is hard to discern. Both factors probably were at work. In either case, Erdogan’s rancor at Saudi Arabia has brought him closer to Teheran.

Turkey should have restricted credit growth and raised interest rates to reduce its current account deficit while it still had time. Erdogan, though, did the opposite: Turkish banks increased their rate of lending while reducing interest rates to businesses and consumers.

Given the country’s enormous current account deficit, this constituted irresponsibility in the extreme. Erdogan evidently thought that his mandate depended on cheap and abundant credit. The credit bubble fed construction, where employment nearly doubled between 2009 and 2013. Construction jobs increased through 2013, after manufacturing and retail employment already had begun to shrink.

I predicted the end of Erdogan’s supposed economic miracle in the Winter 2012 edition of Middle East Quarterly, comparing Erdogan’s boomlet to the Latin American blowouts of the 1990s:

In some respects, Erdogan’s bubble recalls the experiences of Argentina in 2000 and Mexico in 1994 where surging external debt produced short-lived bubbles of prosperity, followed by currency devaluations and deep slumps. Both Latin American governments bought popularity by providing cheap consumer credit as did Erdogan in the months leading up to the June 2011 national election. Argentina defaulted on its $132 billion public debt, and its economy contracted by 10 percent in real terms in 2002. Mexico ran a current account deficit equal to 8 percent of GDP in 1993, framing the 1994 peso devaluation and a subsequent 10 percent decline in consumption.

In the meantime, Turkey has entered a perfect storm. As its currency plunges, import costs soar, which means that a current account of 8% of GDP will shortly turn into 10% to 12% of GDP – unless the country stops importing, which means a drastic fall in economic activity. As its currency falls, its cost of borrowing jumps, which means that the cost of servicing existing debt will compound its current financing requirements. The only cure for Erdogan’s debt addiction, to borrow a phrase, is cold turkey.

The vicious cycle will end when valuations are sufficiently low and the government is sufficiently cooperative to sell assets at low prices to foreign investors, and when Turkish workers accept lower wages to produce products for export.

One might envision a viable economic future for Turkey as the terminus on the “New Silk Road” that China proposes to build across Central Asia, with high-speed rail stretching from Beijing to Istanbul. Chinese manufacturers might ship container loads of components to Turkey for assembly and transshipment to the European and Middle Eastern markets, and European as well as Asian firms might build better factors in Turkey for export to China. Contrary to conventional wisdom, Turkey’s path to Europe lies not through Brussels but through Beijing.

That is Turkey’s future, but as the old joke goes, it can’t get there from here.

Turkey has a small but highly competent professional class trained at a handful of good universities, but the Erdogan regime – the so-called “Anatolian tigers” – have disenfranchised them in favor of Third World corruption and cronyism. The secular parties that bear the faded inheritance of Kemal Ataturk lack credibility. They are tainted by years of dirty war against the Kurds, of collusion with military repression, and their own proclivity towards a paranoid form of nationalism.

Erdogan’s AKP is a patronage organization that has run out of cash and credit, and its fate is unclear. The highly influential Gulen organization has a big voice, including the Zaman media chain, but no political network on the ground.

No replacement for Erdogan stands in the wings, and the embattled prime minister will flail in all directions until the local elections on March 30.

The last thing to expect from Erdogan is a coherent policy response. On the contrary, the former Anatolian villager thrives on contradiction, the better to keep his adversaries guessing.

Turkish policy has flailed in every direction during recent weeks. Erdogan’s Iran visit reportedly focused on Syria, where Turkey has been engaged in a proxy war with Iran’s ally Basher al-Assad. Ankara’s support for Syrian rebels dominated by al-Qaeda jihadists appears to have increased; in early January Turkish police stopped a Turkish truck headed for Syria, and Turkish intelligence agents seized it from the police. Allegedly the truck contained weapons sent by the IHH Foundation, the same group that sent the Mavi Marmara to Gaza in 2010. The Turkish opposition claims that the regime is backing al-Qaeda in Syria. One can only imagine what Erdogan discussed with his Iranian hosts.

Some 4,500 Turks reportedly are fighting alongside 14,000 Chechnyans and a total of 75,000 foreign fighters on the al-Qaeda side in Syria. Ankara’s generosity to the Syrian jihadists is a threat to Russia, which has to contend with terrorists from the Caucasus, as well as Azerbaijan, where terrorists are infiltrating through Turkish territory from Syria. Russia’s generally cordial relations with Turkey were premised on Turkish help in suppressing Muslim terrorism in the Caucasus. There is a substantial Chechnyan Diaspora in Turkey, aided by Turkish Islamists, and Moscow has remonstrated with Turkey on occasion about its tolerance or even encouragement of Caucasian terrorists.

I doubt that Erdogan has any grand plan in the back of his mind. On the contrary: having attempted to manipulate everyone in the region, he has no friends left. But he is in a tight spot, and in full paranoid fury about perceived plots against him. The likelihood is that he will lean increasingly on his own hard core, that is, the most extreme elements in his own movement.

Erdogan has been in what might be called a pre-apocalyptic mood for some time. The long term has looked grim for some time, on demographic grounds: a generation from now, half of all military-age men in Turkey will hail from homes where Kurdish is the first language. “If we continue the existing [fertility] trend, 2038 will mark disaster for us,” he warned in a May 10, 2010, speech reported by the Daily Zaman.

But disaster already has arrived. In some ways Turkey’s decline is more dangerous than the Syrian civil war, or the low-intensity civil conflict in Iraq or Egypt. Turkey held the North Atlantic Treaty Organization’s eastern flank for more than six decades, and all parties in the region – including Russia – counted on Turkey to help maintain regional stability. Turkey no longer contributes to crisis management. It is another crisis to be managed.

Is Iran Testing Trump With Little Attacks in Iraq, Saudi Arabia, and the Persian Gulf?

The sound
of an explosion echoed through the Green Zone on Sunday night around 9:00 p.m.,
a reminder that this most secure part of the Iraqi capital is not, in fact, all
that safe. The projectile appears to have been aimed at the United States
embassy and, after the blast, embassy sirens went off, accompanied by repeated
warnings blaring on loudspeakers instructing everyone to take immediate cover.

Within
the hour the missile was reported to have been fired from the Amana bridge in
Baghdad, missing its likely intended target and landing in an empty field near
the Tomb of the Unknown Soldier, with no casualties reported.

But for a
brief and highly fraught moment alarms were going off in Washington, as well,
where the much-publicized threat of Iranian “proxy” attacks on U.S. interests
and personnel, and the American response positioning bombers and aircraft
carriers, have conjured the specter of a new Middle Eastern war. One breaking
news service breathlessly reported National Security Adviser John Bolton “just
seen arriving at the White House amid rocket attack possibly aimed at the U.S.
Embassy in Baghdad, Iraq.”

President
Trump, meanwhile, tweeted: “If Iran wants to fight, that will be the official
end of Iran. Never threaten the United States again!” It is not clear if he was
responding to the rocket, a Katyusha that might have been fired by any number
of players in Iraq, or to threatening rhetoric by some Iranian officials, or
both.

In any
case, non-essential American personnel at the embassy had already been ordered
to depart days earlier, many moving to posts in nearby countries to continue
their work, and the U.S. embassy was already expecting a possible attack.

Our team
of researchers for the International Center for the Study of Violent Extremism
(ICSVE) landed in Baghdad on May 14, 2019, the day before the U.S. State
Department issued the
security alert to the “non-essentials” in Baghdad and Erbil, recommending they “depart
Iraq by commercial transportation as soon as possible, avoid U.S. facilities
within Iraq, monitor local media for updates, review personal security plans,
remain aware of surroundings.”

An earlier
security alert on May 12 advised
all U.S. citizens of heightened tensions in Iraq and the requirement to remain
vigilant. It recommended not traveling to Iraq, avoiding places known as U.S.
citizen gathering points, keeping a low profile and, once again, being aware of
your surroundings.

For those
of use who have been visiting Iraq since 2006, this seems at once familiar and
strange. Is the threat greater now than it was when the U.S. embassy was housed
in Saddam’s former palace, and frequently underwent mortar fire? In those days
none of the 5,000 embassy personnel were ordered home.

Despite
President Trump saying he does not want war, does this action signal that
something more than just mortar fire is about to come?

A former
senior diplomat who served in Iraq following the 2003 invasion warned that if
the U.S. or Israel had decided to launch air strikes on Iran, emptying the
embassy might be a smart move. Iran could strike back at a close and
convenient target—the U.S. Embassy in Baghdad—and its ballistic missiles would
be much more dangerous and difficult to withstand than mortars or Katyushas.

According
to a senior official in the Iraqi Counter Terrorism Services (CTS) the rocket
Sunday night was launched by the Iranian-backed Kataib Hezbollah. If it came on
Iranian orders, the lone, ineffectual projectile may have been intended as a
pin-prick provocation testing reactions without triggering full-fledged war.
Other recent incidents—a drone attack on a Saudi pipeline; minor explosions on
Saudi and other oil tankers—could fall into the same category.

Iraq,
liberated from the tyranny of Saddam Hussein by the U.S.-led invasion of 2003,
has come under increasing Iranian influence ever since, and the Iran-backed
militias played a key role fighting the so-called Islamic State after the
national army virtually imploded in 2014. They have since become a major
element in the Iraqi defense apparatus, even though some 5,000 U.S. military
personnel are on the ground training and working with other elements of the
Iraqi military.

The
threat inside Iraq to U.S. personnel was revealed in part to Iraqi leaders
during Secretary of State Mike Pompeo’s surprise visit here on May 7.

The
secretary is reported to have told Iraqi officials that U.S. intelligence
detected that Iranian-backed militias moving missiles near bases housing
American forces. Reuters
reported that,
according to a senior Iraqi official privy to the substance of the talks,
Pompeo asked the Iraqi government to rein in the Shiite militias. Pompeo also
expressed U.S. concern about these militias’ increased presence and influence
in Iraq and warned that the U.S. would use force to tackle the security threats
if necessary, without first consulting Baghdad.

Iraq’s
pro-Iranian military factions have long been a concern for U.S. personnel
deployed in the region. Harakat Hezbollah al-Nujaba, a radical Shiite militia
in Iraq has, for example, long been cooperating with the Iranian Islamic
Revolutionary Guard Corps (IRGC), a group that was just declared by the U.S.
State Department as a terrorist organization.

The newly
appointed IRGC leader, Hossein Salami, replied that his people are proud
to be called terrorists by
President Trump while also threatening the U.S. and Israel.

The Iraqi
militia, Nujaba, also was added by the U.S. State Department to the U.S. list
of global terrorist organizations on March 7 this year and its leader Akram
Kaabi was sanctioned.

Nujaba
has been demanding that U.S. troops leave Iraq for quite some time. On May 12,
Nujaba’s leaders proclaimed, “Confrontation with the United States
will only stop once it is eliminated from the region, along with the Zionist
entity,” while also stating that Iraqi resistance factions are ready to target
U.S. interests in Iraq.

The
Iranian-backed Kataib Hezbollah militia, which our source says was behind the
Sunday night rocket attack, warned
in February 2018 that it
might engage in armed confrontation with US forces in Iraq at any moment.
According to one Iraqi source, the Kataib Hezbollah is one of the militias that
recently placed missiles near U.S. military bases.

The
New York Times reported the the U.S. government was picking up an
increase in conversations between the Revolutionary Guards and foreign militias
discussing attacks on American troops and diplomats in Iraq.

The
New York Times also reported that American officials cited intelligence from
aerial photographs of fully assembled missiles on small boats in the Persian
Gulf as cause for the U.S. administration to escalate its warnings about a
threat from Iran. This created concerns that the Islamic Revolutionary Guards
Corps would fire them at United States naval ships or American commercial
ships.

An Iraqi
source confirmed on May 18 that ExxonMobil was evacuating its personnel of 30
to 50 employees from Basra, Iraq, and that the Bahrain embassy had also
evacuated its employees from both Iraq and Iran. And U.S. embassies
disseminated a warning from the Federal Aviation Agency that U.S. commercial
airliners flying over the waters of the Persian Gulf risk being misidentified
and by implication shot down amid rising tensions between the U.S. and Iran.

A
potential conflict much larger than Iranian-backed Shia militias throwing
mortar fire at the now fortress-like U.S. Embassy appears to be brewing amid
credible intelligence coupled with heated anti-American rhetoric.

Yet,
security threats to U.S. personnel serving in Iraq are nothing out of the
ordinary and date back to the 2003 U.S. invasion. At the height of its
activities, the U.S. Embassy in Baghdad had thousands of personnel, including
contractors. They regularly suffered all sorts of threats from IED attacks when
they ventured out on the road, RPG fire when they used helicopters, snipers
when they were out in public view and intermittent but regular mortar fire that
rained down on the temporary trailers that served as housing near the old
Saddam palace where they worked. One mortar penetrated a window to the bathroom
of the Deputy U.S. Ambassador’s office, situated inside the palace, destroying
the brick wall around the window. It was later bricked up completely. The
walkway from the trailers to the palace was mortared so often and so hard that
it was nicknamed “death alley” by embassy personnel serving there.

While
embassy personnel received danger and hardship pay, none were ordered home
during those years, and danger was considered a part of the assignment. IED’s
and mortars occasionally killed embassy personnel, but that did not stop the
mission.

At
present, the U.S. Embassy Baghdad is housed in a complex on a closed street
that only badged officials can enter. The grounds are heavily walled walled and
difficult to enter and inside, the buildings appear strongly built to withstand
assault.

In Erbil,
in Iraqi Kurdistan, which also fell under the non-essential personnel
evacuation order, a restaurant nearby was attacked by a
car bomb in 2015, killing
three non-Americans. But, while less robustly built, the consulate also is
behind a concrete walled-off security space.

U.S.
Embassy diplomatic personnel posted in both Baghdad and Erbil infrequently
leave their fortresses and when they do travel around Iraq, their security
requirements require using armored cars, wearing bullet proof vests and flack
helmets and traveling with armed security guards, sometimes with chase and lead
cars in a convoy.

Likewise,
U.S. Embassy Baghdad and the consulate in Erbil are not family
postings—diplomatic personnel serve for one or two years, leaving their family
members behind.

The new
embassy building, not far from the old one, was planned during the time of
frequent attacks and was undoubtedly built to withstand mortar storms. Long and
short-range ballistic missiles however constitute a whole different threat and
it’s not publicly known if the new embassy has bomb-hardened resistant bunkers
to protect embassy personnel.

Whether
U.S. embassy non-essential personnel will return to post anytime soon remains
to be seen, and given the dangers such personnel have faced in the past and the
fortress in which they currently serve, why they were really ordered home is
also still an unanswered question. With ships coming to the region and troops
readying for potential travel, serious troubles may well be on the horizon.

While the
saber rattling on both sides continues, Baghdad has also made clear that it
doesn’t want to become the battlefield.

Related

Iran vs. US: Bracing for war?

On May 8, 2018, President Donald Trump withdrew the United States from
the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran
nuclear deal, and imposed tough unilateral sanctions on Tehran. Exactly a year
later, this move looks dangerously fraught with unpredictable and potentially
catastrophic consequences for the Middle East.

Britain, France and Germany, as participants and co-sponsors of the
JCPOA, strongly criticized Trump’s anti-Iranian policy and, with Russian and
Chinese support, they established, registered and set in motion, albeit in a
test mode, the Instrument in Support of Trade Exchanges
(INSTEX) – a special-purpose vehicle (SPV) to facilitate non-dollar trade with
Iran.

Tehran took its time hoping for European support. However, on April 22,
2019, Trump ended waivers that Washington had earlier granted China, India,
South Korea, Turkey, Italy, the United Arab Emirates, Japan and Taiwan that
allowed these countries to import Iranian oil. A complete ban on the purchase
of Iranian crude came into force on May 2, 2019. The United States’ ultimate
goal is to stop all Iranian crude exports. Whether this is actually possible is
not clear. What is clear, however, is that the US is ramping up economic
pressure on Tehran.

Meanwhile, Europe will hardly be able to resist Washington’s sanctions
against Iran, which are almost as hard-hitting as the ones that were in effect
between 2012 and 2016 when the Iranian economy was going through hard times. Still,
the EU’s foreign affairs commissioner Federica Mogherini recently went on
record saying that “we will continue to support [JCPOA] as much
as we can with all our instruments and all our political will.”

Just how much will the EU really has to resist US pressure is a big
question though.

Iran found itself in a real fix with President Hassan Rouhani saying
that the situation the country is in today is no different from what it
experienced during the 1980-1988 war with Iraq.

“During the war, we had no problems with our banks, oil sales, imports
and exports. There were only sanctions for the purchase of arms,” he noted.

Hassan Rouhani emphasized the US sanctions’ strong impact on the
country, and called for a concerted effort by all to minimize their effect.

“The enemies’ sanctions against our banking sector also affect our oil,
petrochemicals, steel and agricultural exports, impair the work of Iranian
seaports, shipyards and sea carriers. Our shipping companies have been
blacklisted by the US Treasury,” Rouhani added.

He said that Iran would not bow to US pressure and will be looking for a
way out of this situation.

What can Iran do?

First, it could exit the nuclear deal. Not
immediately, like the US did, but gradually, refusing to fulfill the specific
terms of the accord. Iran is already doing this now.

On May 8, President Rouhani announced that Iran would no longer observe
two key commitments under the JCPOA accord, namely to sell to Russia and the US
uranium enriched to 3.76 percent at volumes exceeding the storage allowed in
Iran (over 300 kilograms). By the time the JCPOA was signed in 2015, the
Islamic Republic had accumulated 10,357 kilos of such low-grade uranium, and
410.4 kilos of uranium enriched to 20 percent. To date, Iran has destroyed its
entire stock of 20-percent-enriched uranium and has shipped surplus
low-enriched uranium (LEU) to Russia and the United States. According to the
JCPOA, Tehran was allowed to enrich limited quantities of uranium for
scientific purposes and sell any enriched uranium above the 300-kilogram limit
on international markets in return for natural uranium. Now Iran will start stocking up on low-enriched uranium again.

Neither will Tehran consider itself
committed to the caps agreed under the deal on the mandatory sale of excess
heavy water used in the production of military-grade plutonium. Iran has a working facility to produce heavy water, which is not
covered by the JCPOA. However, it can store no more than 130 tons of heavy
water. Tehran has already exported 32 tons to the US and 38 tons to Russia. Now it will start storing heavy water again.

President Rouhani gave the other signatories to the 2015 nuclear deal 60
days to make good on their promises to protect Iran’s oil and banking
sectors. The Iranian move is certainly not directed at Washington but, rather,
at Brussels in order to make it more actively and effectively resist US
sanctions or see Iran resume higher levels of uranium enrichment, potentially
all the way to bomb-making capability.

He added that if the EU fails to address Iran’s concerns, Tehran will
suspend the implementation of two more commitments under the JCPOA.

If its demands are not met, Tehran will no
longer be bound by its commitment to enrich uranium up to 3.76 percent. Ali-Akbar Salehi, director of the Atomic Energy Organization of Iran,
said in January that the country had already taken the necessary steps to
resume enrichment in larger volumes and with a higher level of enrichment.

Tehran will also reject help from the 5+1
group of initiators of the JCPOA (Russia, US, Britain, France, China and
Germany) in the reconstruction of the heavy water reactor in the city of Arak.

The R-1 heavy water reactor was designed to produce up to 10 kilograms
of weapons-grade plutonium a year, which is enough to build two plutonium
nuclear weapons. The terms of the JCPOA accord require redesigning the reactor
in such a way as to make it incapable of producing weapons-grade plutonium. To
oversee the process, they set up a working group of representatives of the Atomic
Energy Organization of Iran, the Atomic Energy Authority of China and the US
Department of Energy. In 2017, a UK representative moved in to fill the void
left by the departing US representative. According to an official Iranian
report issued in April 2018, the country had already completed a “conceptual
reconstruction of the reactor.” Still, the reconstruction process is slow
and can easily be reversed. At least for now.

If, however, the EU comes across, then,
according to Hassan Rouhani, Iran will honor its commitments under the JCPOA
deal. “If [the five JCPOA co-signatories] could protect our main
interests in oil and banking sectors, we will go back to square one [and will
resume our commitments],” Rouhani said.

The question is whether the European Union can fully activate INSTEX
and ensure continued oil exports and imports. Many people doubt this.

According to analysts, by demanding that Europeans “bring down to zero”
their purchases of Iranian oil, the United States threatened to slap sanctions
on European companies paying for Iranian oil. Shortly afterwards, almost all
European banks refused to finance Iranian crude imports. The EU thus
inadvertently joined the US sanctions, even though it continued to stick to the
terms of the JCPA accord.

At the same time, European companies were all too happy to go ahead with
the implementation of the part of the agreement that had not yet been banned,
selling unauthorized goods to Iran. Tehran then complained that the deal
allowed Europeans to make money inside Iran while preventing Iranians from
selling their oil in the EU – a violation of the fundamental provision of the
nuclear accord.

Tehran’s threat to walk out of the 2015 nuclear deal is sending a clear
signal to the dithering Europeans to resume Iranian oil imports or see Tehran
restarting nuclear production.

However, preoccupied by more pressing problems, the Europeans have other
things to worry about. Moreover, no one is looking for a showdown with the EU’s
main ally, the United States. According to Russian Oriental affairs expert
Nikolai Kozhanov, Europeans consider
the issue of circumventing US sanctions as an important part of their search
for a mechanism of counter-sanctions in similar situations with more important
economic partners, such as China or Russia.

Therefore, Iran is likely to press ahead with
suspending its obligations under the JCPOA, which include the activation and
acceleration of R&D in the field of improving centrifuges and building more
of them in the future. Tehran could also hold up the implementation of the
Protocol Additional to the Safeguards Agreement with the IAEA. Signed in 2003, the Protocol gives the UN nuclear watchdog greater
access to Iran’s nuclear facilities and provides for surprise inspections. Iran
has not yet ratified this document, even though it fulfilled its requirements
until 2006 and has done so since 2016.

Of course, Iran will go about additional suspensions very carefully (if
it will at all), mindful of their possible consequences, because it would hate
to see Europe turning its back on it and siding with Washington, adding its own
sanctions to the American ones, thus essentially making them international.

Ever since the US’ exit from the JCPOA, Iran has issued a flurry of
serious warnings that it might end its participation in the Treaty on the
Non-Proliferation of Nuclear Weapons (NPT) and the IAEA. On April 28, Iranian
Foreign Minister Mohammad Javad Zarif went on record saying that Tehran was
mulling an exit from the NPT as a response to US sanctions. He added that
Tehran “has many options” of response. “Exit from the NPT is one such
option,” Zarif noted.

This was only a rhetorical threat, however, meant to prod the European
Union towards closer cooperation with Iran as a means of countering US
sanctions. Therefore, it is highly unlikely that Iran would withdraw either
from the NPT or the IAEA, because this could make it an absolute outcast and
the butt of scathing criticism worldwide.

Second, to demonstrate strength and
willingness to resist and safeguard the country’s interests. Iran’s Supreme Leader Ayatollah Khamenei never tires of emphasizing
the need for a tough policy of “resistance,” based on:

an active and effective search for ways to
circumvent crippling economic sanctions;

strengthening the armed forces with an
emphasis on the development of a missile program;

active promotion of Iranian interests in
the region.

The “resistance” policy is primarily built around the Islamic
Revolutionary Guard Corps (IRGC), which brings together the country’s military,
intelligence, police, political, ideological, as well as financial and economic
structures. The IRGC is actually an all-embracing mega holding, led directly by
the Supreme Leader and members of his inner circle. The Revolutionary Guards,
who have proved highly efficient in countering sanctions, modernizing the
armed forces and promoting Iranian activities in the region, are all Tehran
actually needs to implement a strict “resistance” policy.

With the situation developing as it is, Ayatollah Khamenei’s recent
decision to replace the IRGC commander, General Mohammed Ali Jafari, who led
the Corps for more than 11 years, with Brigadier General Hossein Salami looks
pretty natural. The IRGC’s former deputy commander, General Salami is
ideologically closer to Khamenei and is known for his radical statements.
Ayatollah Khamenei also replaced about 60 officers both in the IRGC central
office and local administrations with relatively young, ambitious,
ideologically tested and competent officers. They are tasked with turning the IRGC into an indispensable and
all-embracing institution that dominates the entire gamut of Iranian life: from
ensuring internal and external security all the way to economic activity and
cyberwarfare.

According to Mehdi Khalaji, a researcher at the Washington Institute for
Near East Policy, Ayatollah Khamenei is strengthening the IRGC, which he sees
as the cornerstone of the country’s triad of advanced missile technology, a
nuclear program and asymmetric military capabilities to ensure reliable defense
against any potential aggression by anyone.

Tehran’s decision to strengthen the IRGC was certainly prompted by
President Trump’s statement on April 8, which branded the Corps as a “foreign
terrorist organization.” Until recently, President Rouhani sought to keep the
IRGC in check and limit its impact on many aspects of the country’s life. In
fact, Trump’s recent statement played right into the hands of diehard radicals
within the IRGC and in Iran as a whole.

Iran’s Supreme National Security Council responded to President Trump’s
statement by putting on the list of terrorist organizations the United States
Central Command (CENTCOM), whose area of responsibility includes the Middle
East and Central Asia. Simultaneously, the General Staff of the Iranian Armed
Forces said that the Iranian military was ready to use any means at its
disposal against US troops in the region who are now likewise designated by
Tehran as terrorists. This is putting Americans in peril all across the Middle
East region, primarily in Syria, Iraq, Afghanistan and in the Persian Gulf –
wherever Iranian and US military might cross their paths.

Washington’s latest anti-Iranian move seriously exacerbated the already
very strained relations between the two countries.

Third. To ramp up anti-American propaganda and
warlike rhetoric in order to demonstrate Iran’s strength to the United States
and its readiness to defend its interests even with the use of military force.

Increasingly frustrated with the situation around the JCPOA and doubting
the EU’s ability to resist the US pressure on Iran, Tehran has been rolling
back its participation in the nuclear deal, which is dangerously fraught with a
new nuclear crisis and heightened tensions with the United States.

Meanwhile, an escalation is already happening. The United States is
sending a battery of Patriot air defense missiles and an amphibious warship,
USS Arlington, to CENTCOM’s operational responsibility zone. The Arlington will
join a naval strike carrier group led by the world’s largest warship, the
aircraft carrier Abraham Lincoln (5,680 crew, 90 combat aircraft and
helicopters on board) and a tactical group of B-52 strategic bombers.

Moreover, an updated plan that has just been presented by the Acting US
Secretary of Defense, Patrick Shanahan, envisions the dispatch of up to 120,000
troops to the Middle East if Iran steps up the development of nuclear weapons,
or attacks the US military. However, the plan does not provide for a ground
operation against Iran, which would require a lot more troops.

Iran has promised serious response to any use of force by the United
States, with the IRGC commander, Brigadier General Hossein Salami, warning that
“if America takes a step against us, then we will strike a blow to the head.”
He believes, however, that the United States will not risk using its aircraft
carriers against Iran, and added that since Iran’s defense capabilities are
adequate and sufficient, US aircraft carriers are quite vulnerable.

Military experts know better of course, but when it comes to politics,
chances of resolving the current crisis between Iran and the United States look
pretty slim. In fact, the conflict may be beneficial to both President Trump
and the IRGC.

Trump could use the standoff as a chance to show the opposition Democrats
how tough he is with Iran, which is equally loathed by his supporters and many
of his opponents alike.

Meanwhile, a US military buildup close to the Iranian borders would play
right into the hands of local hardliners who have always been up in arms against
any negotiations concerning the Iranian nuclear program and the nuclear deal
itself.

With the situation favoring the opponents of President Rouhani, the IRGC
is ruling out any possibility of negotiations with the US. The head of the
IRGC’s political bureau, Yadolla Javani, said that “there will be no
negotiations with the Americans,” in a remark that could also be aimed at
politicians inside Iran who would like to maintain a dialogue with the US no
matter what.

Still, according to unconfirmed reports, the Iranians are negotiating
behind closed doors with American representatives in Oman, which is a
traditional meeting place for both.

The IRGC needs tensions running high because this is turning it into the
country’s foremost institution.

What is also clear is a dangerous psychological war now raging between
Washington and Tehran. Just where things may go from now is hard to tell, but
it still looks like the sides will not come to blows after all. The
Iranian-American brinkmanship with concentrations of troops and military
hardware in the region is fraught with unpredictable accidents that can force
the parties to go overboard. Hopefully, things will not go beyond bellicose
rhetoric.

“There will be no war, the Iranian people have chosen the path of resistance
to America, and this resistance will force it to retreat,” Ayatollah Khamenei
said, emphasizing, however, that this resistance is not military in nature.
Neither side wants a military showdown.

Tehran and Washington realize full well that if the situation comes down
to a military flare-up, then this, regardless of the real scale of the
fighting, would spell disaster for the entire Middle East with equally dire
consequences for the rest of the world.

The survey provides insights that should inform autocrats’ quest for
social and economic reform. It also suggests, together with the intermittent
eruption of anti-government protests in different parts of the Arab world, that
Western and Middle Eastern interests would be better served by more nuanced US
and European approaches towards the region’s regimes.

Western governments have so far uncritically supported social and
economic reform efforts rather than more forcefully sought to ensure that they
would bear fruit and have been lax in pressuring regimes to at least curb
excesses of political repression.

Critics charge that the survey by Dubai-based
public relations firm asda’a bcw focussed on the 18-24
age group was flawed because it gave a greater weighting to views in smaller
Gulf states as opposed to the region’s more populous countries such as Egypt,
used small samples of up to 300 people, and did not include Qatar, Syria and
Sudan.

The results constitute a mixed bag for Arab autocrats and suggest that
squaring the circle between the requirements of reform and youth expectations
is easier said than done and could prove to be regimes’ Achilles’ heel.

A majority of youth, weened on decades of reliance on government for
jobs and social services, say governments that are unilaterally rewriting
social contracts and rolling back aspects of the cradle-to-grave welfare state,
have so far failed to deliver.

Even more problematic, youth expect governments to be the provider at a
time that reform requires streamlining of bureaucracies, reduced state control,
and stimulation of the private sector.

A whopping 78 percent of those surveyed said it was the government’s
responsibility to provide jobs. An equal number expected energy to be
subsidized, 65 percent complained that governments were not doing enough to
support young families while 60 percent expected government to supply housing.

By the same token, 78 percent expressed concern about the quality of
education on offer, including 70 percent of those in the Gulf. Yet, 80 percent
of those in the Gulf said local education systems prepared them for jobs of the
future as opposed to a regional total of 49 percent that felt education was
lagging. Nonetheless, only 38 percent of those surveyed in the Gulf said they
would opt for a local higher education.

There appeared to be a similar gap between the foreign and regional
policies of governments and youth aspirations.

Assertive policies, particularly by Gulf states, that have fuelled
regional conflicts, including wars in Libya, Syria, and Yemen, the Saudi
Iranian rivalry and the two-year-old diplomatic and economic boycott of Qatar
run counter to a desire among a majority of those surveyed to see an end to the
disputes. In favour of Saudi, Emirati and Bahraini rulers, 67% of young Arabs
see Iran as an enemy.

The suggestion that Gulf policies towards the Israeli-Palestinian
conflict may not be wholeheartedly supported is bolstered by the fact that the
number of people surveyed this year that viewed the United States as an enemy
rose to 59 percent compared to 32 percent five years ago.

Some two thirds of those surveyed felt that religion played too large a
role, up from 50% four years ago. Seventy-nine percent argued that religious
institutions needed to be reformed while half said that religious values were
holding the Arab world back.

Publication of the survey coincided with the release by the US
Commission on International Religious Freedom (USCIRF) of its 2019 report. The report designated Saudi Arabia as one of the world’s “worst
violators” of religious freedoms, highlighting discrimination of Shia
Muslims and Christians.

“Shia Muslims in Saudi Arabia continue to face discrimination in
education, employment, and the judiciary, and lack access to senior positions
in the government and military,” the 234-page report said.

Forty-four percent of those surveyed named the UAE as their preferred
country as opposed to less than 22 percent opting for Canada, the United
States, Turkey or Britain.

In a white paper
accompanying the survey, Afshin Molavi, a
senior fellow at the Foreign Policy Institute of the Johns Hopkins University
School of Advanced International Studies, concluded that the survey showed that
“the demands and dreams of young Arabs are neither radical nor revolutionary”
and that they were unlikely to “to fall for the false utopias or ‘charismatic’
leaders their parents fell for.”

In the words of Jihad Azour, the International Monetary Fund’s top
Middle East person, “what is needed is a new social contract between MENA
(Middle East and North Africa) governments and citizens that ensures
accountability, transparency and a commitment to the principle that no one is
left behind… The latest youth survey makes clear that we have a long way to
go,” Mr. Azour said in his contribution to the white paper.